Other than which building to buy, the most important question to ask yourself when investing in real estate is “How am I going to pay for this?” If you’re loaded with cash and have a ton of equity built up in your house and other investments, this is a pretty easy question to answer. But for most of us, things aren’t quite so simple.
The reality of today’s market is that you have to have cash to make anything happen. If you’re looking for little or no-money down loans then you’re simply out of luck. For the past year I have had luck sending clients to local banks like Pulaski and Champion for their loans. Deals typically had to be done with 20% down (You better get used to that I’m afraid), but you could oftentimes get some money to help pay for improvements on properties. Some of the foreclosures coming on the market are amazing deals, but almost all of them need work. For the better part of this year, the loan programs were accommodating in these situations. That was then.
As for now, 25% down seems to have become the standard. That might be alright if construction financing were still available, but it isn’t. That means that in order to buy through a local bank, you will have to put down 25% plus all construction costs. In a strict refi environment that can be tough. Still, these terms are pushing out a lot of the competition when making purchases and the quality of deals has gone up accordingly. Properties with potential cap rates for over 15% in good neighborhoods are not unheard of. I have run a few spreadsheets that show a cash-on-cash return of over 40%. With numbers like that, you can justify putting down that kind of money.
The problem is that most people don’t have $50,000 in cash lying around to put into a building. Discussions with my bank contacts don’t sound encouraging, in terms of this improving in the future either. Still, I wouldn’t lose hope altogether. A couple of years back everyone was working through mortgage brokers to finance their deals. They were virtually abandoned in 2007 and 2008, but things might be trending back to them and away from the banks. I have heard a few encouraging things backing up this theory in the past few weeks, but I will hold off on getting my hopes up until I know more.
On the bright side, at least FHA loans are getting easier to get. If you’re looking to live in a two-family or four-family these loans can be great options. If only non owner occupant loans were still as easy to get. So how about it? Anyone have any leads on how to get ahold of some good financing in the St. Louis market. If you do, I’m all ears.